Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 24%, and the annual standard deviation is 13%. Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 Index. The index has an expected return of 20%, and its standard deviation is 18%. Suppose Percival puts all his money in a combination of the index fund and Treasury bills. The Treasury bill yield is 6%. Can he thereby improve his expected rate of return without changing the risk of his portfolio? Multiple Choice No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%<24% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 24%>13% No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%<24% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%>18% Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%>13%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 15P

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Question

Percival Hygiene has $10 million invested in long-term corporate bonds. This bond portfolio’s expected annual rate of return is 24%, and the annual standard deviation is 13%.

Amanda Reckonwith, Percival’s financial adviser, recommends that Percival consider investing in an index fund that closely tracks the Standard & Poor’s 500 Index.

The index has an expected return of 20%, and its standard deviation is 18%.

Suppose Percival puts all his money in a combination of the index fund and Treasury bills.

The Treasury bill yield is 6%.

Can he thereby improve his expected rate of return without changing the risk of his portfolio?

Multiple Choice

No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%<24%
Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 24%>13%
No: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%<24%
Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 20%>18%
Yes: if Percival puts all his money in a combination of the index fund and Treasury, it will produce a return = 16%>13%

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